Archive for July, 2014
By several measures, this economic recovery has been the slowest, most-challenging expansion since World War II. Offsetting the painfully slow recovery has been a massive bull market in stocks, now hovering near all-time record highs, after about tripling in value since early 2009. Unfortunately, many investors have missed the boat (see Markets Soar – Investors Snore and Gallup Survey) with stock ownership near a 15-year low.
But it’s not too late for the “sideliners” to get in…is it? (see Get out of Stocks!*). Milfred and Buford are asking themselves that same question (see Investor Wake-Up Call). Milfred and Buford are like many other individuals searching for the American Dream and are looking for ways to pad their retirement nest egg. The seasoned couple has been around the block a few times and are somewhat familiar with one get-rich-quick strategy…day trading stocks. Thankfully, they learned that day trading stocks didn’t work out too well once the technology boom music ended in the late 1990s. Here’s what the SEC has to say about day trading on their government site:
Be prepared to suffer severe financial losses. Day traders typically suffer severe financial losses in their first months of trading, and many never graduate to profit-making status. Given these outcomes, it’s clear: day traders should only risk money they can afford to lose. They should never use money they will need for daily living expenses, retirement, take out a second mortgage, or use their student loan money for day trading.
Milfred & Buford Day Trade House
Milfred: “Now, Buford, I know we lost of our IRA retirement money day trading tech stocks, but if technical analysis works and all the financial news shows and talking babies on TV say it will make us a lot of cabbage, maybe we should try day trading our house?”
Buford: “Now I know why I married you 60 years ago – it’s that brilliant mind of yours that complements that sexy figure!”
Veteran readers of Investing Caffeine know I’ve been a skeptic of technical analysis (see Technical Analysis: Astrology or Lob Wedge), but a successful investor has to be open to new ideas, correct? So, if technical analysis works for stocks, then why not for houses? The recovery in housing prices hasn’t been nearly as robust as we’ve seen in stocks, so perhaps there’s more upside in housing. If I can get free stock charting technicals from my brokerage firm or online, there’s no reason I couldn’t access free charting technicals from Zillow (or Trulia) to make my fortunes. Case in point, I think I see a double-bottom and reverse head-and-shoulders pattern on the home price chart of Kim Kardashian’s house:
Of course, day trading isn’t solely dependent on random chart part patterns. Pundits, bloggers, and brokerage firms would also have you believe instant profits are attainable by trading based on the flow of news headlines. This is how Milfred and Buford would make their millions:
Milfred: “Snookums, it’s time for you to pack up all our stuff.”
Buford: “Huh? What are you talking about honey buns?”
Milfred: “Didn’t you see?! The University of Michigan consumer confidence index fell to a level of 81.3 vs. Wall street estimates of 83.0, bringing this measure to a new 4-month low.”
Buford: “I can’t believe I missed that. Nice catch ‘hun’. I’ll start packing, but where will we stay after we sell the house?”
Milfred: “We can hang out at the Motel 6, but it shouldn’t be long. I’m expecting the Philly Fed Manufacturing index to come in above 23 and I also expect a cease fire in Ukraine and Gaza. We can buy a new house then.”
I obviously frame this example very tongue-in-cheek, but buying and selling a house based on squiggly lines and ever-changing news headlines is as ridiculous as it sounds for trading stocks. The basis for any asset purchase or sale should be primarily based on the cash flow dynamics (e.g., rent, dividends, interest, etc., if there are any) of the asset, coupled with the appreciation/depreciation expectations based on a rigorous long-term analysis.
When Day Trading Works
Obviously there are some differences between real estate and stocks (see Stocks & Real Estate), including the practical utility of real estate and other subjective factors (i.e., proximity to family, schools, restaurants, beach, crime rates, etc.). Real estate is also a relatively illiquid and expensive asset to buy or sell compared to stocks. – However, that dynamic is rapidly changing. Like we witness in stocks, technology and the internet is making real estate cheaper and easier to match buyers and sellers.
Does day trading a stock ever work? Sure, even after excluding the factor of luck, having a fundamental information advantage can lead to immediate profits, but one must be careful how they capture the information. Raj Rajaratnam used this strategy but suffered the consequences of his insider trading conviction. Furthermore, the information advantage game can be expensive, as proven by Steven Cohen’s agreement to pay $1.2 billion to settle criminal charges. While I remain a day trading and technical analysis skeptic, I have noted a few instances when I use it.
Whatever your views are on the topics of day trading and technical analysis, do Milfred and Buford a favor by leading by example…invest for the long-term.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds, but at the time of publishing SCM had no direct position in Z, TRLA, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.
Men (and arguably women to a lesser extent) enjoy the process of hunting for a mate. Chasing the seemingly unattainable event aligns with man’s innate competitive nature. But the quest for the inaccessible is not solely limited to dating. When it comes to other aspirational categories, humans also want what they cannot have because they revel in a challenge. Whether it’s a desirable job, car, romantic partner, or even an investment, people bask in the pursuit.
For many investment daters and trading speculators, 2008-2009 was a period of massive rejection. Rather than embracing the losses as a new opportunity, many wallowed in cash, CDs, bonds, and/or gold. This strategy felt OK until the massive 5-year bull market went on a persistent, upward tear beginning in 2009. Now, as the relentless bull market has continued to set new all-time record highs, the negative sentiment cycle has slowly shifted in the other direction. Back in 2009, many investors regretted owning stocks and as a result locked in losses by selling at depressed prices. Now, the regret of owning stocks has shifted to remorse for not owning stocks. Missing a +23% annual return for five years, while getting stuck with a paltry 0.25% return in a savings account or 3-4% annual return achieved in bonds, can harm the psyche and make savers bitter.
Greed hasn’t fully set in like we witnessed in the late period of the 1990s tech boom, but nevertheless, some of the previous overly cautious “sideliners” feel compelled to now get into the stock game (see Get Out of Stocks!*) or increase their equity allocation. Like a desperate, testosterone-amped teen chasing a prom date, some speculators are chasing stocks, regardless of the price paid. As I’ve noted before, the overall valuation of the stock market seems quite reasonable (see PE ratio chart in Risk Aversion Declining – S. Grannis), despite selective pockets of froth popping up in areas like biotech stocks, internet companies, and junk bonds.
Even if chasing is a bad general investment practice, in the short-run, chasing stocks (or increasing equity allocations) may work because overall prices of stocks remain about half the price they were at the 2000 bubble peak (see Siegel Bubblicious article). How can stocks be -50% off when stock prices today (S&P 500) are more than +25% higher today than the peak in 2000? Plain and simply, it’s the record earnings (see It’s the Earnings Stupid). In the latest Sidoxia newsletter we highlighted the all-time record corporate profits, which are conveniently excluded from most stock market discussions in the blogosphere and other media outlets.
The Investor’s Emotional Roller Coaster (Perceived Risk vs Actual Risk)
The “Thrill of the Chase” is but a single emotion on the roller coaster sentiment spectrum (see Barry Ritholtz chart in Sentiment Cycle of Fear and Greed). The problem with the above chart is many investors confuse actual risk from perceived risk. Many investors perceive the “euphoric” stage of an economic cycle (top of the chart) as low-risk, when in actuality this point reflects peak risk. One can look back to the late 1990s and early 2000 when technology shares were priced at more than 100x years in earnings and every hairdresser, cabdriver and relative were plunging their life savings into stocks. The good news from my vantage point is we are a ways from that euphoric state (asset fund flows and consumer confidence are but a few data points to support this assertion).
The key to reversing the sentiment roller coaster is to follow the thought process of investment greats who learned to avoid euphoria in up markets:
“I’m always more depressed by an overpriced market in which many stocks are hitting new highs every day than by a beaten-down market in a recession.” -Peter Lynch
“Be fearful when others are greedy, and be greedy when others are fearful.” –Warren Buffett
While the “Thrill of the Chase” can seem exciting and a rational strategy at the time, successful long-term investors are better served by remaining objective, unemotional, and numbers-driven. If you don’t have the time, interest, or emotional fortitude to be disciplined, then find an experienced investment manager or advisor to assist you. That will make your emotional roller coaster ride even more thrilling.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold long positions in certain exchange traded funds, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.